And yet the A.I.G. F.P. traders left behind, much as they despise him personally, refuse to believe Cassano was engaged in any kind of fraud. The problem is that they knew him. And they believe that his crime was not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses. “When he said that he could not envision losses, that we wouldn’t lose a dime, I am positive that he believed that,” says one of the traders. The problem with Joe Cassano wasn’t that he knew he was wrong. It was that it was too important to him that he be right. More than anything, Joe Cassano wanted to be one of Wall Street’s big shots. He wound up being its perfect customer.

2. Peace With the Islamists. Amr Hamzawy and Jeffrey Christiansen have a thought-provoking, and somewhat discomfiting piece, in Foreign Policy suggesting that America make peace with non-violent Islamist groups – pointing out that many of them actually rely on America’s support for democracy for their success in a region of the world dependent on America and filled with dictatorships, and pointing out the signs that many of these groups are open to such a peace offer.

6. Shirsky on the Future of Journalism. Clay Shirsky has an excellent post over at Cato Unbound discussing without really predicting the future of journalism. As always with Shirky, thought-provoking and worth the read. He makes a point that I have been ruminating about in a number of posts recently (here and here) – that:

[J]ournalism is about more than dissemination of news; it’s about the creation of shared awareness.

In my posts, I labeled this “shared awareness” the “conventional wisdom.”

This Sunday, America witnessed Pakistani President Zardari’s disgraceful performance on Meet the Press. He pandered; he obfuscated; he shirked any responsibility or blame; he turned briefly eloquent – and then outrageously self-righteous. It was clear that he is not one tenth the politician his wife was – and it seems not one tenth the leader. She may have been corrupt (as it seems was he) – but he appears to lack her communicative gifts or her aptitude for politics. On top of it, his management style seems be Bush-level incompetence. The most ridiculous point Zardari tried was to invoke AIG’s bailout as an argument to give more money to Pakistan.

David Gregory – to his credit – asks the tough question – the question that needs to be asked of Pakistan’s leader (especially given stories like this) although Gregory does manage to shift responsibility for the criticism of Zardari off to another reporter:

The question a lot of people ask is are you – is Pakistan really committed to that war? In The New York Times Dexter Filkins, who, who’s reported from Afghanistan and Pakistan, writes this: “Whose side is Pakistan really on? … Little in Pakistan is what it appears. For years, the survival of Pakistan’s military and civilian leaders has depended on a double game: assuring the United States that they were vigorously repressing Islamic militants–and in some cases actually doing so–while simultaneously tolerating and assisting the same militants. From the anti-Soviet fighters of the 1980s and the Taliban of the 1990s to the homegrown militants of today, Pakistan’s leaders have been both public enemies and private friends. When the game works, it reaps great rewards: billions in aid to boost the Pakistani economy and military and Islamist proxies to extend the government’s reach into Afghanistan and India.”

Zardari’s responded:

[W]hat billions are you talking about? Like I said, a billion dollar a year? That’s not even – altogether, this aid package is not even one tenth of what you gave AIG. So let’s face it; we need, in fact, much more help.

[W]hen he asked for financial assistance, he likened it to the government’s bailout of the troubled insurance giant, American International Group.

While it is probably true that Zardari needs more funds – his pique at being asked to justify these funds is galling – especially when so much of it was apparently spent preparing Pakistan’s military to fight India instead of the Taliban. Though this analogy is politically stupid – it does bring up an interesting parallel.

AIG has been the nexus of the financial crisis in much the same way that Pakistan is the center of the threat of strategic terrorism.

When synthetic CDOs were invented, they were structured in such a way as to create positions that were safer than AAA-rated debt. (An explanation of what this means here.) These positions were called super-senior. Yet the ever “cautious” bankers decided to hedge against even these supposedly risk-free positions – allowing them to free up more capital, so that for the purposes of regulation, it was treated as if they had not lent out any money at all. They decided to buy insurance, calling this insurance a credit default swap, hedging against the risk that even this super-safe investment would go bad. There was one big player in this, one firm that provided so much of this insurance which led to this boom in lending and enormous leveraged positions – AIG – who insured these super-safe debts with nary a plan to deal with defaults. After all – these debts were super-senior – there would only be defaults if historically unprecedented numbers of these mortgages went south. (Precedent only went back forty years or so with modern macroeconomic record-keeping.) AIG Financial – a small part of the AIG empire which spanned insurance across dozens of industries around the world – decided to leverage the entire company to insure these products – leading to enormous profits in the short-term – and systematic risk as soon as things went bad. If AIG had not been able to pay on its insurance to the big banks, things would likely have been worse.

The nexus, if it was anywhere, was in Pakistan – a nuclear state whose national hero sold parts to the highest bidder, whose intelligence service backed the Taliban, and whose North-West Frontier Province became a refugre for al Qaeda.

What it comes down to is that both are too big – and too connected – to fail. Both have had billions of American dollars pumped into them to prop them up. Both have prompted outrage as they have seemed to use this money to benefit themselves and not for the purposes it was intended. Both are controlled by leaders whose hands were far from clean in creating the current crisis. Neither the leadership of Pakistan nor the leadership of AIG have taken responsibility for the crisis that occurred oin their watch – in their realm of control – blaming America and the world at large for their problems instead. Perhaps because of this, the leadership of both seem to believe that they deserve to be rewarded for their efforts rather than held accountable for their significant failures. Yet even so, the costs of the failure of either is likely catastrophic.

Maybe this is the point Zardari was trying to make – his way of taunting us with the fact that he knows we cannot allow him to fail – just like AIG.

If the Indian Army advanced within 60 miles of Islamabad, you can bet Pakistan’s army would be fully mobilized and defending the country in pitched battles.

The Pakistani Taliban is now within that distance – 60 miles – of the capital. It’s advance has not been halted and it continues to destabilize and then take over large portions of Pakistan. You can see the strong position the Taliban is in by reading the story published just a few days ago by Jane Perlez and Pir Zubair Shah also in the Times telling the story of a Taliban strategist who gave them an inside look at the Taliban’s regional strategy – which focuses in a large part on exploiting the border between Afganistan and Pakistan over which the Taliban move without qualms, but which U.S. forces generally respect. The Pakistani army and intelligence agencies are both said to be sympathetic to the Taliban and islamist extremism in general – and U.S. strategists believe their goal is to wait out America’s interest in the region and then use these Taliban forces to exert control over Afghanistan and to destabilize India, which they still consider the main threat to their national security. This is why – despite the billions of dollars in funding given to the Pakistani military and intelligence agencies since September 11 for the purpose of aiding them in their war against the Taliban – their forces they have arrayed against the Taliban are ill-equipped and too few in number – as they have used most of these funds to build up their military for a more conventional war against India. David Sanger, speaking at the Council on Foreign Relations some weeks ago told a story he described as telling you “everything you need to know about the U.S.-Pakistan relationship.” It is a story, essentially, of a leadership that is friendly with the Taliban – even as they tell the Americans they are doing everything they can to stop them.

The fall of Pakistan to the Taliban is perhaps the worst case scenario national security experts can imagine. The Taliban is allied with Al Qaeda – who have planned to use weapons of mass destruction against America. Pakistan has nuclear weapons in numerous locations throughout the country – and is already responsible for more nuclear proliferation than any other nation on earth. It is, what Dick Cheney might call, the nexus of America’s worst fears. And worse yet, none of America’s policies in the region seemed to have had the desired effect – former President Musharraf seemed unable to truly take on the Taliban and terrorist elements, despite his being motivated their attempts to kill him – and America, by continuing to support Musharraf in the face of his desperate bids to hold onto power, alienated many Pakistanis and was finally removed from office due to the pressure from both America and groups organizing for a civil society; Benazir Bhutto, martyred running for office, said all the right things and seemed to recognize that the fundamental enemy of Pakistan was no longer India – but the religious extremists within it’s own borders; but she never had an opportunity to lead Pakistan again; her widower, the current President Zardari has followed too much in the path of Musharraf and had likewise angered many Pakistanis by using his power to undermine political rivals (leading to massive destabilizing protests until he backed down due to pressure from America and groups organizing for civil society) – while at the same time, despite fine words, he has been unable to make progress in combating the Taliban. Instead, he signed a deal with them to allow the Taliban to impose their extremist religion on a large region of the country. Despite the glaringly self-interested actions of Pakistani leaders – and the fact that even today with the Taliban encroaching upon the capital, it is not clear that the government is yet committed to rooting out these insurgents or terrorists – America has been forced time and again to double down in our support of Pakistan’s leaders. What other choice do we have? Pakistan is too important to allow it to fail – and it has nuclear weapons.

Which is why we can longer accept the constant refrain from Pakistan’s leaders that “Everything’s fine; please send helicopters.” Pakistan is “ground zero in many of the worst-case scenario exercises gamed out by national security officials [and seems] on the verge of spiraling out of control.” General Petreaus is apparently saying privately that “the next two weeks are critical [in] determining whether the Pakistani government will survive.” David Kilcullen, an Australian counterinsurgency expert advising the Obama administration, expressed a related point: “We have to face the fact that if Pakistan collapses it will dwarf anything we have seen so far in whatever we’re calling the war on terror now.”

This is where we are – at the edge of an abyss. And it seems there is nothing for us to do but to trust that our government is properly trusting the ineffectual (or perhaps conflicted) Pakistani leadership to control the situation.

Or is that all we can do? Wendy Chamberlin, a former ambassador to Pakistan suggested another idea: “We have to make clear that our relationship is with the people of Pakistan and not with [any] one man…” I don’t this is what she meant – but it seems to me that the best way to make this clear is for Americans to begin communicating with Pakistanis. And I don’t just mean the government.

Remember the Obama campaign – which encouraged tens of thousands of volunteers to call or email or knock on the doors of millions of citizens – in a grass-roots effort to change the nation? We should start that. Here. Today. Go on Facebook. Find someone from Pakistan. Send them a pen-pal letter and ask them what’s going on – so each of us can do our part to figure out what is going on in what we are being told is a very dangerous situation. Be humble; be curious; be respectful. But reach out. It seems kind of silly, but what other choice do we have?

In the past few weeks, Eliot Spitzer has been all around us. His Slate columns have become a must-read. He was against AIG before it was cool. He was railing against the excesses of Wall Street while everyone else was enjoying the fake boom.

If it were not for the scandal that forced him to resign, this would have been Eliot Spitzer’s time. Vice Presidential buzz would be growing; he would be one of the go-to guys that Obama would call to give him cover as he dealt with Wall Street. It is based on this that David Rothkopf at Foreign Policy listed Spitzer as one of the “losers of the week” saying that:

[T]he A.I.G. scandal and the collapse of Wall Street could have been [Spitzer’s] apotheosis, the moment the howling dogs of ambition in his breast might have finally gotten enough red meat of press exposure.

But despite his current disgraced status – and no doubt in part because of it – he has been able to talk more candidly about the “real scandal” of the AIG bailout: that it “has been a way to hide an enormous second round of cash to the same group that had received TARP money already.”

I’m going to repeat what I said before – as the conventional wisdom states that the only things that can truly destroy a political career are “a dead woman or a live boy,” Spitzer will be back. Given the magnitude of this scandal, he may be back sooner than we expect. Interviewed on The Brian Lehrer Show last week, his politic answer on whether he is planning to make a comeback as a media person made it clear he is still intent on winning back the public’s good graces.

His understated and calculated public appearances are not consistent with a man looking to become a media personality – he would want more appearances and try to adopt a more strident tone if this was his goal; they are not consistent with a man who is done with politics – as he does not have the gravitas and devil-may-care honestly and looseness that comes with this life decision; instead, he seems to be staging a comeback. He waited just over a year from his resignation before giving his first interview – despite the increasingly clear Wall Street scandal that he had been brewing. He’s focusing on policy, substance, and seriousness to avoid as much as possible talking about his past scandals. But his answer still have the slipperiness of a pol.

There’s no one so brave and wise as the politician who’s not running for office and who’s not going to be…

Yet it is almost as likely that former Governor Eliot Spitzer is following an alternate path that seems similar but has a different conclusion. Let me propose a corollary to Weld’s statement:

A bit braver and a little less wise than the politician who’s not running for office and who’s not going to be is the chastened politician who seeks redemption in the form of speaking truth to power from his exile until he has established his moral bona fides enough to be allowed back in.

A bit less snappy though. Meanwhile, Jay Leno has his own suggestion for how to deal with the AIG bonus issue (the one that Spitzer points out is a side issue):

You have to appreciate the subtle balance Jay manages here – and the craft and delicate political sensibility that goes into a joke like this. Aiming for a mass audience, he can’t offend either Democrats or Republicans. Yet a political joke that is offensive to no one just isn’t funny. So Jay manages to cram two alternate jokes into one – with one interpretation for Democrats and the other for Republicans, and a certain cognitive dissonance allowing both interpretations.

On a superficial level, Leno is chastising the Obama administration and saying that it should emulate the Bush administration.

But he undermines this suggestion by invoking as a fact – which it is, even if the mainstream media does not often acknowledge it – the lawlessness of the Bush administration – and perhaps even mocking their oft-used Jack Bauerdefense.

Yet on another level, what he is proposing – that Obama just forget the law and go after AIG – has a certain elemental satisfaction to it – and would probably be a popular move. There would be a catharsis there, instead of the interminable responsibility of the Obama administration.

As I mentioned above – there is a certain craft to this. Often, Leno’s monologues are seen as without edge but when they work, they allow multiple edges such as this joke does.

As a side note to all of this – once something becomes the premise of a joke by Jay Leno, you know it has been popularly accepted as true – or true enough. The fact that the premise of this joke was Bush administration lawlessness is pretty significant in that regard.

The longer answer: This “Strictly Confidential” document that appeared on Scribd appears to be the same one that Andrew Ross Sorkin described last week in the New York Times as “getting a lot of attention” “inside the corridors of power in Washington.” The presentation is not addressed to anyone explicitly, but it appears to be meant as a kind of briefing on the importance of bailing out AIG for Congressmen and other second-level decision-makers unfamiliar with finance. As is my occasional practice, I’m excerpting some of the more important/interesting points raised in the document for convenient citation later.

This first point is obvious, but still bracing to hear from the source:

Without additional federal tools being deployed in the AIG situation, AIG will not be able to repay its obligations. Despite adequate current security against the U.S. government’s investment, that investment may not be recovered.

Although some critics of the current approach have begun to question whether the collapse of Lehman led to the fallout that immediately began, it seems pretty clear to me as well as to most who were in the loop at the time that the fallout was the result of Lehman’s collapse. AIG wants to point out that the government did not adequately understand what would happen with the fall of Lehman Brothers – and that AIG is far bigger, more complex and interconnected than Lehman ever was:

Just as the government was unable to predict that the failure of Lehman would lead to the collapse of the Reserve Fund, followed by much of the money market industry, the government would be even less capable of predicting the fallout from the collapse of a much larger, more global and more consumer-oriented institution such as AIG.

Then of course, AIG begins to explain how it’s subsidiaries are essential to the running of the government in general:

AIU insures the U.S. military, the U.N., U.S. and foreign embassies, and important commercial and other organizations worldwide, including the Panama Canal, oil rigs, trucking, marine cargo and Doctors without Borders.

AIU’s Defense Base Act program provides coverage to contractors in support of the rebuilding of the infrastructure in Iraq and Afghanistan.

Also, another subsidiary could take down many cities as:

AIGCI is the second largest U.S. investor in municipal bonds.

The report comes to the following conclusions:

Insurance is the oxygen of the free enterprise system. Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined.

The failure of the world’s largest insurer at a time of major global financial and economic instability will exacerbate the challenge of reigniting consumer confidence.

Since life insurance has changed greatly in character over the last two decades – from just a basic provision of death and disability benefits to a vehicle for retirement savings and wealth accumulation – the effects of disrupting the industry are wideranging and significant.

There is a legitimate public policy rationale for regulatory reform of the industry, and the federal government continuing role in AIG’s destiny would be consistent with such a policy direction.

In other words, AIG is too big and too important to fail. It’s probably true – but it’s a big galling to hear a company asking to be bailed out – again and again and again and again – making it. Especially after that company just announced the largest ever quarterly loss in the history of capitalism.

[digg-reddit-me]Isn’t that what Jim Cramer does on every show, you might ask? That’s a fair point.

But what if Jim Cramer has now decided that he will dedicate himself to defeating Barack Obama’s agenda, declared himself to be on the “White House enemies list;” and that what he is doing now is what he has done all along – to “fight to help viewers and readers make and preserve capital.” That’s what I call jumping the shark. Bad investment advice is what Cramer does entertainingly. But this sense of self-grandiousity – and his seeming demand to be taken seriously instead of as a ridiculous figure. That’s too much.

The self-puffery is evident as Cramer insists he is on a “White House enemies list” (his source is the noted Democratic party insider Rush Limbaugh). Cramer thinks he is on this “list” because made an outrageous comment about White House policy being designed to destroy wealth and kill kittens, and when questioned about it, the White House press secretary pointed out that Mr. Cramer’s advice on how to create wealth wasn’t what the White House was looking for.

Cramer claims he has spent his career helping viewers and readers “preserve” their capital – and that his advice now to oppose Obama is just a continuance of that. So for a moment, let’s look at the fate of those who would have followed Cramer’s advice in the past. The Consumerist points out that if one had followed Jim Cramer’s stock-picking advice since 2000, you would have been better served by flipping a coin – as Jim Cramer’s advice is slightly worse than a coin toss.

You should be buying things and accept that they are overvalued, but accept that they’re going to keep going higher. I know that sounds irresponsible, but that’s how you make the money. Right now, up is down, left is right, peace is war. [my emphasis]

Bear Stearns. Cramer recommended buying this stock on 8/17/07 at $118.20 per share. He lost 95 percent on this one – selling at just under $6 per share on 3/20/08.

Morgan Stanley. Cramer recommended buying this stock on 9/15/06 at $70.95 per share. Its recently been trading in the mid-teens.

Lehman Brothers. Cramer recommended this stock on 10/17/05 at $55.18 per share. On 9/5/08 with the stock trading at $16 per share, on CNBC, Cramer selected Lehman as a “screaming buy” and said things couldn’t get any worse for the company. The stock now trades at less than $1 per share for more than a 99 percent loss for Cramer.

Merrill Lynch. Cramer recommended buying this stock on 9/19/05 at $60.17 per share and sold it on 9/12/08 for $17.05 per share for a 72 percent loss…

(And, by the way, Cramer recommended buying financial services giant AIG on 11/7/05 at $66.34 per share and the stock currently trades around $2 per share for a 97 percent loss.)

Given his history, it’s a bit rich of Jim Cramer to claim his career has been about “preserving” anything other than his own entertaining presence. If he meant to dedicate his life to “preserving the wealth of his viewers and readers,” clearly he’s been quite a miserable failure. In terms of sheer lunacy, on the other hand, he’s still got it.

But I, for one, am grateful the White House isn’t following the Jim Cramer guide to wealth creation. And for those of you that are – I might advise you invest in a solid coin to flip, as it would apparently serve you better.

“As we look at 2009, on every issue, with the single exception of Iraq, everything is worse…Pakistan is worse. Afghanistan is worse. Russia is worse. Emerging markets are worse. Everything big out there is worse, and some will be made even worse by the economic crisis.”

There is a geopolitical storm coming, concluded Bremmer, “and it is not priced into the market yet.”